A positive fallout of the spate of accounting irregularities revealed in recent times is that the regulatory authorities have begun to look closely at the manner in which statutory auditors of listed companies conduct their affairs. Last year, the Securities and Exchange Board of India had proposed new rules, giving it the powers to levy penalties or even to prosecute auditors if they were found negligent. Recently, the Ministry of Corporate Affairs had proposed barring Deloitte Haskins and Sells and BSR Associates from auditing for five years for having colluded with the management of IL&FS Financial Services, to falsify financial statements. This threat of strict punitive actions is leading to another unwanted trend — auditors abruptly resigning from listed companies. This is unacceptable as sudden resignations of statutory auditors, who are responsible for presenting the true state of a company’s affairs to investors and other stakeholders, can cause unnecessary upheavals in the functioning of the company as well as its stock price. It has also been noted that the only reason that auditors have been citing for resigning was ‘pre-occupation’. SEBI is justified in trying to restrict such wayward behaviour through the proposals in its consultative paper on the subject.
The regulator is attempting to make auditors disclose all the irregularities leading to the resignation, including misstatements or falsification of accounts, lack of co-operation by the management, not providing the required information, etc. Despite the Companies Act, the SEBI’s LODR regulations as well as ICAI’s auditing standards, requiring auditors to carefully weigh the implications of their resignation and communicating it effectively to the relevant authorities, the auditors are not doing so. SEBI is now stating that if the reason for the exit is non-provision of information, a disclaimer shall be included in the audit report to that effect. Also, SEBI is proposing that auditors should complete the annual audit for the financial year before exit, if they had signed the audit reports of the first three quarters. This will ensure that the disclosure of financial statements is not delayed by the transition to new auditors. There is, however, a chance that auditors may henceforth choose to quit earlier in the year. SEBI can consider laying down that auditors can resign only after completion of an annual audit.
It is also smart to involve the audit committee in monitoring the functioning of the auditors. It is the responsibility of the audit committee, which has a majority of independent directors, to determine the nature and scope of the audit and to monitor its effectiveness. By laying down that the views of the audit committee and the Board of Directors should be included with the resignation letter submitted to the stock exchange, the regulator is ensuring that the committee does not shirk its responsibility. Similarly, making the panel the channel for communications between the management and auditors will ensure that auditors are not intimidated by the management.